The Primary Market In India 3z6233
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The Primary Market in India Prepared By – PINAL SHAH Faculty at L.J.Institute of Management Studies Ahmebabad, Gujarat
Introduction Free pricing regime Book building On-line Epos Resource mobilization from domestic market
New issue Private placement Non-govt public ltd co. Absorption of private capital issues Banks and FI in public sector MF
Resource mobilization from international market
GDRs ADRs FCCBs ECBs Euro Issues
prepared by PINAL SHAH
2
Introduction
Primary market is market for fresh capital. Funds raised through
IPO Right Issue Private Placement
Three category
Issuer Investor Intermediary prepared by PINAL SHAH
3
Free price regime
Before 1992 companies have to take permission from CCI to decide timing, quantum and price of New issue. For pricing two criteria was decided
The net assets value and Price earning value
prepared by PINAL SHAH
4
Resource mobilisation through New Issue Market
New Issue Private Placement market Non- govt Public limited companies Mega issues by Non-govt Public limited companies Absorption of private capital issues Banks and FI in the public sector MF prepared by PINAL SHAH
5
New Issue Market – Prospects and Right Issues The growth rate was highest immediately after reforms announced, I.e. 1992-93. It is also due to abolition of capital issue s act and free pricing of issues. Since 1995-96 primary mkt was depressed, because
scams took place in secondary market. on some scrip were very high and declined after listing. (I.e. saurashtra cement – 285 and at listing – 50) Strict disclosure standards by SEBI Overall slowdown in economy This decline in PSU through prospects and right issue was much sharper that they cannot tap mkt PINAL SHAH for 3 consecutive prepared years.by(I.e. 1996-1999)
6
Resource mobilisation
Most IPO having of their offer price on listing day. I.e.Biocon, price bands – 270-314, listed on 7 April 2004 at 400 and touched to 740 on 13 April only. This attracts several new players and many companies for IPO.
prepared by PINAL SHAH
7
Ye ar
No of IPO
CR .
Remarks
2003-2004 (govt Epos only)
29
17.8
All govt IPO like IPCL, IBP, BOM, GAIL raised 14.3 crores thorough sale of govt stake. - Other private IPO like Biocon, Patni computers, TV today IOB, UCO bank were also over subscribed
Oct 03 –04 (whole)
30
30,302 cr
=3 (preceding five yr) 19,690 cr through disinvestments (65%) 10,612 cr through private sectors.
01-02
7
1202
02-03
6
1039
04-05
60
22 – Epos – By Non Financial companies 6-Epos by six companies – ICICI, TCS, Sterlite, NTPC, Jet Airways, PNB – 72.9 % of total resource prepared by PINAL SHAH
8
TCS IPO Up beat response from mkt in July 2004. Listed as 1076 and allotted at 850 Rs. Was also milestone in secondary mkt. Offer for 55.4 million shares and oversubscribed by 7.7 times and raised 54,200 crores. NTPC – may 04 raised 5369 cr. prepared by PINAL SHAH
9
Private Placement It is direct sale of newlyMarket issued securities to group of investor (I.e. FI, banks, corporate, HNI) by issuer through merchant bankers. Advantage
Time and cost is less compared to IPO and right issue. It can be customised for both issuer and investor. It does not require detail compliance of formalities, ratings, and disclosure norms
During 1995-2002 this route has grown to 88%. Major issuers - All FI, PSUs, central and state level undertakings (I.e. AEC bonds), banks Major subscribers - banks, Provident funds, MF, HNI Instruments used
Debt – debentures, bonds Equity – preference shares prepared by PINAL SHAH
10
Factors affecting Private Placement market
Prolonged conditions in primary market PP is not bound to any regulatory system till sept 2003. No lock-in period for promoters No compliance system for merchant bankers Banks can raise their tier II capital. Operational flexibility and attractive pricing Private sector can tap this route to retire their old expensive bonds/ debt instruments Short- term debentures are more popular with issuers and investors. prepared by PINAL SHAH
11
Facts of Private Placements
In India Privately placed securities are itted for trading, but not listed. Banks do not trade this securities and hold till maturity. No secondary market for such securities Banks and Fis have over Rs. 1 Lakh crores exposure in PP. Earlier RBI issued guide lines PP having more than 50 . Later on sept 2003, SEBI issued stringent disclosure norms which was still unregulated. prepared by PINAL SHAH 12
Current scenario
PP now regulated. Companies want to list their privately placed securities. For securities up to 10 lakhs such disclosure made through company on the site of exchanges. Credit rating also becomes compulsory.(lest investment grade is necessary) All debt issuer must have redemption reserve and must appoint trustee. Securities issued and traded in demat form All securities must be executed on exchanges only. RBI also barred Fis from investing in uncrated prepared by PINAL SHAH 13 securities and securities below minimum credit
Non-govt public limited companies
Until 1990 their shares as right issuer and prospects were only 45 % After reforms announced (I.e.1991)their participation raised to 91% in 92-93. After 1994-95 this has been decreased due to scam in secondary market till 2001-02. Again decline in 03-04 duet to strengthen norms of SEBI. Debenture issue in private sector – prominent in 1990-91 and declined due to free pricing era and again prepared gained popularity in 97-98 14 by PINAL SHAH
Mega issues
An issue size of more than 100 Cr termed as mega issues. In 94-95, 41 mega issue worth of 12,090 cr were issued. In 05-06, highest amount of (49) mega issues worth of 23,815 cr were issued which is 87% to new capital issue. Largest FPO was – Icici bank (5101 cr) IPO – Suzlon – 1496 cr Largest – RPL – 2700 cr. prepared by PINAL SHAH
15
Absorption of private capital issues
This is the concept of underwriting. It was compulsory till 1994 than was optional. When it was compulsion the amount underwritten was 97% of total issue amount raised through public.
prepared by PINAL SHAH
16
Banks and FI’s participation in public issues
After 1991 banks and FI’s can also participate in Epos. Initially the participation was slow (1.7% of total amount raised in 91-92) but than raised to 46.5% in 98-99. Later on banks emerged as biggest class of issuer in 02-04. In 1993 SBI entered into market at low price which soon rise and it also attracts other banks to trade in secondary and primary market. prepared by PINAL SHAH
17
Resource Mobilisation through international market
GDRs ADRs FCCBs ECBs Euro Issues
prepared by PINAL SHAH
18
GDRs It is equity instruments issued in abroad
market by overseas corporate bodies against the shares/bonds of Indian companies held with domestic custodian bank. I.e. Indian companies engaged in IT, software are eligible to offer their nonresident/resident permanent employees GDRs/ADRs against the issue of ordinary shares. An issuing company can raise funds through ordinary equity shares but this shares would be transferred in GDRs in some ratios. I.e 1 GDR – 10 shares.prepared by PINAL SHAH
19
GDR
An issuing company have to obtain prior permission of the dept of economics affairs, ministry of finance and govt of India. An intermediary is approved would be investment banker ed with securities and exchange commission in USA, or in UK or appropriate authority in , , Singapore or Japan.
prepared by PINAL SHAH
20
GDR
GDRs are freely transferable outside Indian and divided in respect of shares y GDR is paid in Indian rupees only. They are listed and traded on foreign stock exchange and OTC market. The holder of GDR can convert it into no of shares at any time. Till conversion GDR does not have any voting rights but once converted it is listed on Indian stock exchange. Most of Indian companies have their GDRs issues listed on Luxembourg stock exchange and the London stock exchange. prepared by PINAL SHAH 21
ADRs
ADRs are negotiable instruments in dollars Issued by US Depository banks A non – US company has to deposits its shares with US depository banks It receives receipts from which the same company can issue ADRs. ADRs serve as stock certificates. ADRs listed on NYSE and NASDAQ. ADRs taps to US institutional and retail markets while GDRs tap to only US prepared by PINAL SHAH institutional market.
22
ADRs
GDRs can be converted into ADRs by surrendering the existing GDRs and depositing the underlying equity shares with ADR depository in exchange for ADRs. The company has to comply with SEC requirements but company does not get any funds in conversion. The trend towards conversion of GDR into ADR as ADR is more liquid and cover wider market. prepared by PINAL SHAH
23
ECBs
Indian corporate are allowed to raise foreign loans for financing infrastructure projects. RPL raised $125 million in august 1996. The issue was without guarantee of bank and with very low coupon rate of 7.84%. In oct 1996, global telesystems raised 60 million swis francs in FCB form. The company offered LIBOR + 175 points interest rate. SIDBI raised $ 20 million for 38 years bonds (largest in India) prepared by PINAL SHAH
24
ECBs
Indian companies are free to raise ECBs from any internationally recognised source such as bank, export credit agencies, suppliers of equipment, foreign collaborators, foreign equity holders and international capital markets.
prepared by PINAL SHAH
25
FCCB (Foreign currency convertible bonds)
It is issued by Indian companies and subscribed by non-resident in foreign currency. It carries fixed interest or coupon rate and are convertible into a certain number of ordinary shares at preferable price. It can be converted into ordinary shares of issuing company either in whole or in pat on the basis of any equity related warrants attached to the debt instruments. prepared by PINAL SHAH
26
FCCB
Till conversion, the company has t pay interest in dollars and if conversion option is not exercised, the redemption is also made in dollars. Interest rate is low but exchange risk is more. So only companies with low debt equity ratios and large forex earnings potential opt for FCCB. For the bonds upto $ 50 million no permission required, upto $100 million RBI permission and above that permission from ministry of finance is necessary. The maturity period is 5 yrs (minimum) and no restriction on time period for converting into shares. prepared by PINAL SHAH
27
FCCB
Interest rate is lower in FCCB than bonds or loan Conversion into equity is attractive features for investor. Higher for conversion of equity higher will be the yield on FCCB. Initially only cash outflow of interest only as interest rates are very low between 0 to 1.5%. Only 2 FCCB in 2001-02. BSES and Gujarat preparedAmbuja by PINAL SHAHcement. 28
Euro Issues
Euro issue market comprises FCCB, GDRs/ADRs. In 1993-94 and 94-95 , Indian companies raised rs 14,500 cror through euro issues. Infosys was the first company to tap international market in march 1999 (listed on NASDAQ), than ICICI (NYSE) and satyam (NASDAQ). Satyam was not listed any of Indian stock exchange. In 1999-200 Indian firms raised $ 1billion and in 2000-01 $4 billion was raised. prepared by PINAL SHAH
29
Euro Issues
Rediff.com was the first dot company to list nearly at 100% on NASDAQ even bying BSE. Rediff.com could not able to bring IPO in Indian stock market due to accumulated losses of $8.6 million. Indian companies can go directly for ADRS without domestic offering as the scrip appreciates more in US market as concept of futuristic stocks is stronger in US. prepared by PINAL SHAH
30
Organizing Euro Issues
A company which wants to tap international market for raising resources has to prepare is books of s of last three to five years in GAAP format, prevalent in US or US for its GDR/ADR issue. The merchant banker occupies a pivotal place as he formulates the mktg strategy desings the issue structure and arranges syndicate , underwriters and other intermediaries. prepared by PINAL SHAH
31
Organizing Euro Issues
After finalizing offer documents he conducts road shows where interviews with fund managers and potential investors re held and distribution of pamphlets brochures and reports of issuing company. These help in knowing investor response to issue. Issue price is also based on this response and price of securities on the domestic stock exchange (if listed). Issue price is decided few hours before opening of issue. In the initial years Indian GDRs were priced at discount by in nov 1993, Mahindra and mahindra placed its GDR atprepared par.by PINAL SHAH 32
Private Equity
It is long-term equity investment by a fund in private and public (listed) firms with successful business models and potential for a higher growth. PE plays an important role in growth of enterprises. It helps the investee companies in promoting their growth by providing capital knowledge and skills. It also helps in formulating and shaping the corporate strategy of ivnestee firms and improving their corporate governance. Some PE firms such as Warbury Pincus Investments, GW capital investment and GA parterners investments have invested highly successful companies like Bharti, Spectramind, ICICI ventures, prepared by PINAL SHAH 33
The End The Primary Market
Introduction Free pricing regime Book building On-line Epos Resource mobilization from domestic market
New issue Private placement Non-govt public ltd co. Absorption of private capital issues Banks and FI in public sector MF
Resource mobilization from international market
GDRs ADRs FCCBs ECBs Euro Issues
prepared by PINAL SHAH
2
Introduction
Primary market is market for fresh capital. Funds raised through
IPO Right Issue Private Placement
Three category
Issuer Investor Intermediary prepared by PINAL SHAH
3
Free price regime
Before 1992 companies have to take permission from CCI to decide timing, quantum and price of New issue. For pricing two criteria was decided
The net assets value and Price earning value
prepared by PINAL SHAH
4
Resource mobilisation through New Issue Market
New Issue Private Placement market Non- govt Public limited companies Mega issues by Non-govt Public limited companies Absorption of private capital issues Banks and FI in the public sector MF prepared by PINAL SHAH
5
New Issue Market – Prospects and Right Issues The growth rate was highest immediately after reforms announced, I.e. 1992-93. It is also due to abolition of capital issue s act and free pricing of issues. Since 1995-96 primary mkt was depressed, because
scams took place in secondary market. on some scrip were very high and declined after listing. (I.e. saurashtra cement – 285 and at listing – 50) Strict disclosure standards by SEBI Overall slowdown in economy This decline in PSU through prospects and right issue was much sharper that they cannot tap mkt PINAL SHAH for 3 consecutive prepared years.by(I.e. 1996-1999)
6
Resource mobilisation
Most IPO having of their offer price on listing day. I.e.Biocon, price bands – 270-314, listed on 7 April 2004 at 400 and touched to 740 on 13 April only. This attracts several new players and many companies for IPO.
prepared by PINAL SHAH
7
Ye ar
No of IPO
CR .
Remarks
2003-2004 (govt Epos only)
29
17.8
All govt IPO like IPCL, IBP, BOM, GAIL raised 14.3 crores thorough sale of govt stake. - Other private IPO like Biocon, Patni computers, TV today IOB, UCO bank were also over subscribed
Oct 03 –04 (whole)
30
30,302 cr
=3 (preceding five yr) 19,690 cr through disinvestments (65%) 10,612 cr through private sectors.
01-02
7
1202
02-03
6
1039
04-05
60
22 – Epos – By Non Financial companies 6-Epos by six companies – ICICI, TCS, Sterlite, NTPC, Jet Airways, PNB – 72.9 % of total resource prepared by PINAL SHAH
8
TCS IPO Up beat response from mkt in July 2004. Listed as 1076 and allotted at 850 Rs. Was also milestone in secondary mkt. Offer for 55.4 million shares and oversubscribed by 7.7 times and raised 54,200 crores. NTPC – may 04 raised 5369 cr. prepared by PINAL SHAH
9
Private Placement It is direct sale of newlyMarket issued securities to group of investor (I.e. FI, banks, corporate, HNI) by issuer through merchant bankers. Advantage
Time and cost is less compared to IPO and right issue. It can be customised for both issuer and investor. It does not require detail compliance of formalities, ratings, and disclosure norms
During 1995-2002 this route has grown to 88%. Major issuers - All FI, PSUs, central and state level undertakings (I.e. AEC bonds), banks Major subscribers - banks, Provident funds, MF, HNI Instruments used
Debt – debentures, bonds Equity – preference shares prepared by PINAL SHAH
10
Factors affecting Private Placement market
Prolonged conditions in primary market PP is not bound to any regulatory system till sept 2003. No lock-in period for promoters No compliance system for merchant bankers Banks can raise their tier II capital. Operational flexibility and attractive pricing Private sector can tap this route to retire their old expensive bonds/ debt instruments Short- term debentures are more popular with issuers and investors. prepared by PINAL SHAH
11
Facts of Private Placements
In India Privately placed securities are itted for trading, but not listed. Banks do not trade this securities and hold till maturity. No secondary market for such securities Banks and Fis have over Rs. 1 Lakh crores exposure in PP. Earlier RBI issued guide lines PP having more than 50 . Later on sept 2003, SEBI issued stringent disclosure norms which was still unregulated. prepared by PINAL SHAH 12
Current scenario
PP now regulated. Companies want to list their privately placed securities. For securities up to 10 lakhs such disclosure made through company on the site of exchanges. Credit rating also becomes compulsory.(lest investment grade is necessary) All debt issuer must have redemption reserve and must appoint trustee. Securities issued and traded in demat form All securities must be executed on exchanges only. RBI also barred Fis from investing in uncrated prepared by PINAL SHAH 13 securities and securities below minimum credit
Non-govt public limited companies
Until 1990 their shares as right issuer and prospects were only 45 % After reforms announced (I.e.1991)their participation raised to 91% in 92-93. After 1994-95 this has been decreased due to scam in secondary market till 2001-02. Again decline in 03-04 duet to strengthen norms of SEBI. Debenture issue in private sector – prominent in 1990-91 and declined due to free pricing era and again prepared gained popularity in 97-98 14 by PINAL SHAH
Mega issues
An issue size of more than 100 Cr termed as mega issues. In 94-95, 41 mega issue worth of 12,090 cr were issued. In 05-06, highest amount of (49) mega issues worth of 23,815 cr were issued which is 87% to new capital issue. Largest FPO was – Icici bank (5101 cr) IPO – Suzlon – 1496 cr Largest – RPL – 2700 cr. prepared by PINAL SHAH
15
Absorption of private capital issues
This is the concept of underwriting. It was compulsory till 1994 than was optional. When it was compulsion the amount underwritten was 97% of total issue amount raised through public.
prepared by PINAL SHAH
16
Banks and FI’s participation in public issues
After 1991 banks and FI’s can also participate in Epos. Initially the participation was slow (1.7% of total amount raised in 91-92) but than raised to 46.5% in 98-99. Later on banks emerged as biggest class of issuer in 02-04. In 1993 SBI entered into market at low price which soon rise and it also attracts other banks to trade in secondary and primary market. prepared by PINAL SHAH
17
Resource Mobilisation through international market
GDRs ADRs FCCBs ECBs Euro Issues
prepared by PINAL SHAH
18
GDRs It is equity instruments issued in abroad
market by overseas corporate bodies against the shares/bonds of Indian companies held with domestic custodian bank. I.e. Indian companies engaged in IT, software are eligible to offer their nonresident/resident permanent employees GDRs/ADRs against the issue of ordinary shares. An issuing company can raise funds through ordinary equity shares but this shares would be transferred in GDRs in some ratios. I.e 1 GDR – 10 shares.prepared by PINAL SHAH
19
GDR
An issuing company have to obtain prior permission of the dept of economics affairs, ministry of finance and govt of India. An intermediary is approved would be investment banker ed with securities and exchange commission in USA, or in UK or appropriate authority in , , Singapore or Japan.
prepared by PINAL SHAH
20
GDR
GDRs are freely transferable outside Indian and divided in respect of shares y GDR is paid in Indian rupees only. They are listed and traded on foreign stock exchange and OTC market. The holder of GDR can convert it into no of shares at any time. Till conversion GDR does not have any voting rights but once converted it is listed on Indian stock exchange. Most of Indian companies have their GDRs issues listed on Luxembourg stock exchange and the London stock exchange. prepared by PINAL SHAH 21
ADRs
ADRs are negotiable instruments in dollars Issued by US Depository banks A non – US company has to deposits its shares with US depository banks It receives receipts from which the same company can issue ADRs. ADRs serve as stock certificates. ADRs listed on NYSE and NASDAQ. ADRs taps to US institutional and retail markets while GDRs tap to only US prepared by PINAL SHAH institutional market.
22
ADRs
GDRs can be converted into ADRs by surrendering the existing GDRs and depositing the underlying equity shares with ADR depository in exchange for ADRs. The company has to comply with SEC requirements but company does not get any funds in conversion. The trend towards conversion of GDR into ADR as ADR is more liquid and cover wider market. prepared by PINAL SHAH
23
ECBs
Indian corporate are allowed to raise foreign loans for financing infrastructure projects. RPL raised $125 million in august 1996. The issue was without guarantee of bank and with very low coupon rate of 7.84%. In oct 1996, global telesystems raised 60 million swis francs in FCB form. The company offered LIBOR + 175 points interest rate. SIDBI raised $ 20 million for 38 years bonds (largest in India) prepared by PINAL SHAH
24
ECBs
Indian companies are free to raise ECBs from any internationally recognised source such as bank, export credit agencies, suppliers of equipment, foreign collaborators, foreign equity holders and international capital markets.
prepared by PINAL SHAH
25
FCCB (Foreign currency convertible bonds)
It is issued by Indian companies and subscribed by non-resident in foreign currency. It carries fixed interest or coupon rate and are convertible into a certain number of ordinary shares at preferable price. It can be converted into ordinary shares of issuing company either in whole or in pat on the basis of any equity related warrants attached to the debt instruments. prepared by PINAL SHAH
26
FCCB
Till conversion, the company has t pay interest in dollars and if conversion option is not exercised, the redemption is also made in dollars. Interest rate is low but exchange risk is more. So only companies with low debt equity ratios and large forex earnings potential opt for FCCB. For the bonds upto $ 50 million no permission required, upto $100 million RBI permission and above that permission from ministry of finance is necessary. The maturity period is 5 yrs (minimum) and no restriction on time period for converting into shares. prepared by PINAL SHAH
27
FCCB
Interest rate is lower in FCCB than bonds or loan Conversion into equity is attractive features for investor. Higher for conversion of equity higher will be the yield on FCCB. Initially only cash outflow of interest only as interest rates are very low between 0 to 1.5%. Only 2 FCCB in 2001-02. BSES and Gujarat preparedAmbuja by PINAL SHAHcement. 28
Euro Issues
Euro issue market comprises FCCB, GDRs/ADRs. In 1993-94 and 94-95 , Indian companies raised rs 14,500 cror through euro issues. Infosys was the first company to tap international market in march 1999 (listed on NASDAQ), than ICICI (NYSE) and satyam (NASDAQ). Satyam was not listed any of Indian stock exchange. In 1999-200 Indian firms raised $ 1billion and in 2000-01 $4 billion was raised. prepared by PINAL SHAH
29
Euro Issues
Rediff.com was the first dot company to list nearly at 100% on NASDAQ even bying BSE. Rediff.com could not able to bring IPO in Indian stock market due to accumulated losses of $8.6 million. Indian companies can go directly for ADRS without domestic offering as the scrip appreciates more in US market as concept of futuristic stocks is stronger in US. prepared by PINAL SHAH
30
Organizing Euro Issues
A company which wants to tap international market for raising resources has to prepare is books of s of last three to five years in GAAP format, prevalent in US or US for its GDR/ADR issue. The merchant banker occupies a pivotal place as he formulates the mktg strategy desings the issue structure and arranges syndicate , underwriters and other intermediaries. prepared by PINAL SHAH
31
Organizing Euro Issues
After finalizing offer documents he conducts road shows where interviews with fund managers and potential investors re held and distribution of pamphlets brochures and reports of issuing company. These help in knowing investor response to issue. Issue price is also based on this response and price of securities on the domestic stock exchange (if listed). Issue price is decided few hours before opening of issue. In the initial years Indian GDRs were priced at discount by in nov 1993, Mahindra and mahindra placed its GDR atprepared par.by PINAL SHAH 32
Private Equity
It is long-term equity investment by a fund in private and public (listed) firms with successful business models and potential for a higher growth. PE plays an important role in growth of enterprises. It helps the investee companies in promoting their growth by providing capital knowledge and skills. It also helps in formulating and shaping the corporate strategy of ivnestee firms and improving their corporate governance. Some PE firms such as Warbury Pincus Investments, GW capital investment and GA parterners investments have invested highly successful companies like Bharti, Spectramind, ICICI ventures, prepared by PINAL SHAH 33
The End The Primary Market
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